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Cornering College Towns and Capital Cities

Long before 9/11 and recession would deal a severe blow to the lodging sector, hotel developer John Q. Hammons sensed a significant change about to hit the industry. It was the early 1980s; Hammons owned some 65 Holiday Inns, which he started developing in 1958. Driving down a California freeway one day, Hammons saw limited-service hotels popping up along the roadside, threatening to steal his customers. It was at that moment that he decided to go upscale.

“I knew the country eventually would be overrun with these things, and oh boy, has it ever happened,” says the 85-year-old Hammons, chairman of John Q. Hammons Hotels, which he founded in 1969 and took public in 1994. The company owns and operates 60 hotels in 22 states — 13 of which Hammons has privately financed since 1998. “Four-star hotels are harder to produce; they cost more money. But they're a safer investment.”

That decision and other key moves that followed have earned the publicly traded but closely held John Q. Hammons Hotels high marks. The Springfield, Mo.-based company — which predominantly operates Embassy Suites, Holiday Inns and Marriott International franchises — has outperformed the hospitality industry for 12 straight quarters in terms of occupancy, average daily rate and revenue per available room (RevPAR) in one of the most grueling operating environments ever.

In the first quarter of this year, John Q. Hammons Hotels reported occupancy of 65.5%, compared with an industry average of 56.8%, according to Smith Travel Research.

The company's average daily rate (ADR) of $101.29 and revenue per available room (RevPAR) of $66.33, also outperformed the industry by $14 and $17, respectively.

Meanwhile, revenues in the first quarter increased 3.9% to $114.4 million compared with the first quarter of 2003. Net income rose to $4.3 million for the quarter compared with $3.5 million a year ago. (However, net profit in the first quarter of 2003 was later reduced by $3.3 million due to charges related to partnership interests.)

Ingredients for Success

So how is it that Hammons has been able to maintain or increase revenues while other hotel companies have suffered from double-digit revenue decreases?

In addition to developing four-star hotels, Hammons targets secondary and tertiary cities where state capitals or universities, or both, are located: “Even during recessions they don't fire the politicians, and kids still go to school,” says Hammons, who is commonly referred to as “John Q.”

Additionally, he focuses on developing atrium-designed properties with waterfalls, glass elevators and other flourishes. He also positions his hotels next to convention centers and he routinely adds meeting space to his hotel projects — about 30,000 sq. ft. on average.

It's that meeting and convention angle that played a role in the company's most recent success. About 45% of bookings at John Q. Hammons Hotels comprise group travelers, a roughly $100 billion annual market segment that the company courts. After 9/11, the hotel operator intensified its focus on group travel by launching the “Book a Block of Rooms” plan. The 10-month program provided incentives to the company's sales and marketing staff to secure group and convention reservations.

The effort paid off. John Q. Hammons' group business remained steady even as group travel nationally dropped an estimated $20 billion following 9/11. “It was a focused and customized strategy,” says Susan Jansen, a fixed-income analyst with Lehman Brothers. “[John Q. Hammons Hotels] was able to accomplish that because of the convention centers near its hotels and the meeting rooms within its hotels, and it compensated them in a depressed business cycle.”

Milestone

In March, Hammons opened the 150th property of his career, a $30 million, 225-room Courtyard by Marriott in downtown Oklahoma City. The property epitomizes the broad thrust of his development philosophy, yet it also shows that Hammons is not averse to occasionally departing from his game plan.

A small market, Oklahoma City is the state capital, it's home to several universities, and it's located at the intersection of major highways — interstates 40, 35 and 44. The hotel is in the Bricktown entertainment district that includes a convention center, a new arena, restaurants, clubs and other traffic generators. All of those are major pieces of Hammons' strategy.

What's the departure? Courtyards are hardly considered full-service hotels — even though Hammons included a 146-seat restaurant and bar in the project — and the property lacks Hammons' signature atrium. But a need for a mid-scale property in downtown Oklahoma City convinced him to seize the opportunity. After all, a four-star, atrium-style hotel already operates nearby — the 311-room Renaissance Oklahoma City Convention Center Hotel. It's owned by, who else, but John Q. Hammons Hotels.

“John Q. has spent 50 years of his life developing hotel properties and being very much involved in the operation of them,” says Greg Crown, an executive vice president with hospitality advisory firm PKF Consulting in Dallas. Crown spent five years as head of development at Embassy Suites in the late 1980s and early 1990s. “He's made things work at every level — large market, small market, mid-level properties, high-level properties, various brands. He's done it all and has been successful at all levels,” adds Crown.

Undaunted by Economic Cycles

Hammons continues to deploy his strategy. When the recession began in March 2001, he responded in the same way he did to five previous recessions over the last 45 years: he continued developing.

“Everybody else gets scared and stops developing, but we don't run and hide because opportunities are available and pricing has stopped escalating,” Hammons says. “We've had great luck building five, eight, 10 hotels every time we've had a recession.”

The recent downturn was no exception: Hammons has privately financed and opened 13 hotels since 1998, and eight of those have opened since 2000. Hammons continues to privately build new hotels while hiring the company to manage the properties once they open.

In fact, over the next two years Hammons is on track to open six new hotels valued at $300 million, which will expand John Q. Hammons Hotels' management portfolio to 23 states. Beyond that, Hammons says, he has 12 more hotels in varying preliminary development stages.

In addition, the company spends some $30 million a year to upgrade existing properties, and is working to convert four independent hotels within the portfolio to brands. In Cedar Rapids, Iowa, for example, the company is spending about $4 million to upgrade the 221-room Collins Plaza, which will be converted to a full-service Marriott in September.

As a result of those commitments, John Q. Hammons Hotels continues to earn brand salutations. Each year, Embassy Suites recognizes its top 10% performing hotels, in terms of quality assurance and customer satisfaction, and John Q. Hammons Hotels typically accounts for one-third of all winners. This year was no different.

“Hammons builds nice hotels and he keeps them up,” says David Greydanus, senior vice president for brand management with Embassy Suites. “He has a real commitment to customer service, customer quality and reinvesting in his hotels.”

Loaded with Leverage

The passion to develop, however, has created the most highly leveraged hotel company in the industry. That's a result of one of Hammons' other strategies — though a favorite of just about all developers — which is to use other people's money when building.

After John Q. Hammons Hotels completed an IPO in 1994, it loaded on debt to finance the development of 21 new hotels over five years. But in 1998, with five hotels still under construction, the excessive leverage prompted the company to cease development.

Since then, Hammons has been privately financing properties, and the company manages the hotels when they open. John Q. Hammons Hotels has a right of first refusal to buy the properties, and the company could acquire Hammons' hotels as part of a succession plan, according to company officials.

The company still exhibits a debt hangover. Its debt-to-equity ratio was 378 to 1 in the first quarter of 2004, compared with 179 to 1 in the third quarter of 2003, according to Weiss Ratings. Company officials say a $9.7 million charge in the fourth quarter of 2003 to reflect a fair value writedown of its World Golf Village Renaissance Resort in St. Augustine, Fla., has skewed the ratio.

Still, the company has accelerated its debt retirement and is refinancing at lower interest rates. Between the end of 2002 and the first quarter of this year, debt dropped about $25 million to $779 million.

In fact, because of its operating performance over the last couple of years, John Q. Hammons Hotels has pushed down its net debt leverage (a credit statistic that calculates debt to earnings before interest, taxes, depreciation and amortization) more rapidly than its competitors. That's happened even as other hotel companies have paid down more debt, says Jansen of Lehman Brothers, because competitors have failed to see earnings growth.

Debt or no debt, Hammons plans to stick to the way he's done business ever since his epiphany on a California freeway 20 some years ago. Because Hammons kept developing and the company maintained its group business after 9/11, John Q. Hammons Hotels is now positioned to reap the rewards a recovery should bring. “The backbone of our strength,” Hammons says, “is to stay the course.”